February 3, 2023

Money News PH

The Premier Blog Where Money Talks

Six Crypto Investors Talk DeFi and the Road to Adoption in 2023 • TechCrunch

The crypto venture capital industry has become more selective thanks to the general market downturn and faltering confidence caused by a series of scandals and market disruptions, but investors in large companies are still writing checks in the space.

Amid market volatility, decentralized finance, or DeFi, is an area that continues to be a focus both in the crypto VC world and across the community as new use cases, protocols, and projects emerge.

Between 20% and 50% of crypto-related pitches today are focused on DeFi, said several investors we surveyed. This shows that there are a large number of DeFi projects looking for funding.

“To differentiate in this crowded space, founders should focus on highlighting unique technologies and a clear advantage for a specific use case, as well as a defensible moat,” said Alex Marinier, founder and general partner at New Form Capital.

Ultimately, DeFi is a reflection of traditional finance (TradFi), and founders who have deep industry knowledge of TradFi coupled with a basic understanding of blockchains will set themselves apart from the rest of the teams, shared Paul Veradittakit, general partner at Pantera Capital .

Over the past year, the crypto world has faced a handful of massive industry-changing events, such as the collapse of the Terra/LUNA ecosystem in May and the collapse of cryptocurrency exchange FTX in early November. Both events brought down many smaller startups and big players who mixed with these now defunct market players.

As the market looks to the future, some venture capitalists are revising their investment strategies, while others are sticking with their current plans, with maybe a small change or two. Read on to find out how active investors feel about DeFi, how to advise their portfolio companies in the face of a lack of funding, how best to approach them, and more.

We asked:

Michael Anderson, Co-Founder, Framework Ventures Alex Marinier, Founder and General Partner, New Form Capital Samantha Lewis, Principal, Mercury Paul Veradittakit, General Partner, Pantera Capital David Gan, Founder and General Partner, OP Crypto Mike Giampapa, General Partner, Galaxy Ventures

Michael Anderson, co-founder of Framework Ventures

How big is the DeFi market today? How much growth do you expect over the next five years?

When thinking about the DeFi market, we consider the total market cap of DeFi assets, the total value locked (TVL) and the trading volume. While Total Value Locked (TVL) as a metric certainly has its weaknesses, we think it’s still a decent measure of activity in the sector. If TVL rises, we also think it’s possible that total market cap could follow.

We closely monitor the relative activity of the sector, such as trades, volumes and users, compared to centralized alternatives such as exchanges. Despite the negative sentiment surrounding crypto today, we still believe activity will return to the industry at some point. However, after all these dramatic centralized finance (CeFi) explosions, we believe that the next time users decide to enter the space, they will think twice about trusting a CeFi exchange or company and sign up for the use will decide decentralized protocols.

What were the biggest challenges for your company in 2022? What steps are you taking to better prepare for 2023?

As with most investors in this space, our biggest challenge has been managing the seemingly endless CeFi explosions and outages that have rocked our industry. We’ve been able to avoid the vast majority of these explosions because we passed on several FTX ecosystem projects.

As a result, Framework hasn’t been hit nearly as hard as many of the big VC firms in the industry, and we’re in a pretty strong position to continue to deploy capital into this new market.

These CeFi incidents have caused a lot of collateral damage across the industry, so ensuring that all of our portfolio companies are sound, liquid, well capitalized and able to survive the next 1-3 years has been a major priority over the past 12 months. This means helping the founders in our portfolio reduce costs, prioritize high growth activities and provide advice on products, growth and future fundraising strategies in a less-friendly funding environment.

In general, our position is a validation of our core tenets for the past 3 years and we will continue to focus on DeFi, Web3 gaming and more. Given that many other companies are not currently actively investing, we see this market as a great opportunity for Framework to selectively allocate capital.

How do you advise your portfolio companies for 2023?

We work with them to reduce costs and focus on surviving the next 1-3 years. We believe in crypto for the long term, but we don’t know how quickly the market could recover and so survival should be our top priority.

We also encourage founders to think more strategically about project development. When a team has focused on three different areas, we encourage them to prioritize only the highest growth activity instead.

What percentage of pitches are DeFi protocols or projects? What can they do to stand out in the broader crypto landscape?

Today, about 30% to 35% of the pitches we receive are clearly DeFi-biased.

If a DeFi project really wants to stand out, we want to see them think about where the puck is going. We look for projects that have the potential to be regulation friendly. It’s a non-starter if the team doesn’t think about regulations or think they can just figure it out later.

In addition, we are interested in projects that are directly related to institutions or at least have a convincing growth strategy that involves institutions. We don’t think retail will provide projects with a large enough market in DeFi in the next two years, so creating something attractive to institutions should be more of a focus than it has been so far.

We also want to see that the project is differentiated from a product perspective. We’re not interested in another Uniswap clone or an open-sea clone of the week-old-L1 flavor.

What is your current strategy for investing in DeFi protocols and projects? How has that changed compared to previous quarters?

In 2020, during the peak of the DeFi summer, the market was big enough for projects to court retail and DeFi equestrians [a nickname for people interested in risky, niche, speculative crypto projects]. The market is completely different now.

Unfortunately, retail has been blown up in more than a dozen different ways over the past year, and they’re unlikely to be back in a few years. Therefore, we focus more on projects that are thinking about targeting new, more institutional users and markets.

We understand that regulation is likely to come, so we’re very interested in projects that are regulation-friendly, or at least regulation-friendly.

What types of DeFi use cases do you think will see more mainstream adoption in the future? Which areas of DeFi are perceived as more important today than they used to be?

With the merger officially behind us, liquid staking has become a huge area of ​​excitement for us. We believe that liquid staking projects will receive much more attention after Shanghai goes live and users will have the opportunity to withdraw their assets without worrying about illiquidity.

How to bridge the gap between traditional finance (TradFi) and DeFi?

We need to see more DeFi products and services that are more realistically accommodating to institutions. This means projects that have pro-regulatory elements built into the products themselves, including KYC, the ability to cap certain assets, and more. Projects that institutions can do business with will not look and feel like the traditional DeFi that we are used to and will co-exist as a relatively different ecosystem.

How do you think regulatory frameworks can impact the DeFi space? Which country or region seems to be going in the best direction?

Sometime in 2023 we will have the landmark crypto regulation everyone has been waiting for years. More clarity could be very positive.

We don’t have a fixed position, but on the surface it looks like the UK is fast becoming one of the most open from a thought-leader’s perspective.

How would you like to receive pitches? What’s the most important thing a founder should know before talking to you?

We like a good plot. We want to know why you are working on this problem, why it needs to be solved now and why you think you can beat everyone else. Competitive advantages are crucial for us.

Alex Marinier, Founder and General Partner of New Form Capital

How big is the DeFi market today? How much growth do you expect over the next five years?

The DeFi market currently has around $50 billion in TVL. Over the next five years, we expect the market to split into two categories: permitted and non-permitted.

Permissioned DeFi will gain traction among institutions as it combines the benefits of blockchain technology with the compliance standards of traditional finance. If just a small percentage of traditional finance activity moves on-chain, it could create a market opportunity worth more than $1 trillion.

If you add permissionless DeFi, which is more geared toward individual users and makes up most of DeFi today, the combined market has the potential to be worth between $500 billion and $2 trillion by 2028.

However, the growth of DeFi will depend on more than just an increase in use cases. It is also influenced by developments in infrastructure, regulation and financial innovation.

What were the biggest challenges for your company in 2022? What steps are you taking to better prepare for 2023?

Coping with the high profile breakdowns (Terra, Celsius, FTX) was certainly the focus of 2022. We needed to take more time to support our founders and ensure they had enough runway to weather an extended bear market.

This year our focus is on helping founders find creative ways to grow in this market and position themselves for the next bull market. We are also focused on sourcing opportunistic investments at attractive valuations and incubating more projects internally.